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58–349 PDF 2010

THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION

OF USPS WORKSHARE DISCOUNTS AND PRODUCTS THAT DO NOT COVER THEIR COSTS

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

MAY 12, 2010

Serial No. 111–76

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

JUDY CHU, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF

COLUMBIA

STEPHEN F. LYNCH, Massachusetts, Chairman

ELEANOR HOLMES NORTON, District of

Columbia

DANNY K. DAVIS, Illinois

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

WM. LACY CLAY, Missouri

GERALD E. CONNOLLY, Virginia

JASON CHAFFETZ, Utah

MARK E. SOUDER, Indiana

BRIAN P. BILBRAY, California

ANH ‘‘JOSEPH’’ CAO, Louisiana

WILLIAM MILES, Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 12, 2010 ............................................................................... 1

Statement of:

Burrus, William, president, American Postal Workers Union, AFL–CIO;

Lawrence G. Buc, president, SLS Consulting, Inc.; Michael Riley, professor, University of Maryland University College; James R. O’Brien,

vice president for distribution and postal affairs, Time Inc.; and Hamilton Davison, executive director, American Catalog Mailers Association . 47

Buc, Lawrence G. ...................................................................................... 70

Burrus, William ......................................................................................... 47

Davison, Hamilton ..................................................................................... 100

O’Brien, James R. ...................................................................................... 92

Riley, Michael ............................................................................................ 82

Robinson, Maura, vice president of pricing, U.S. Postal Service; and John

Waller, director of Office of Accountability and Compliance, Postal Regulatory Commission ...................................................................................... 10

Robinson, Maura ....................................................................................... 10

Waller, John ............................................................................................... 20

Letters, statements, etc., submitted for the record by:

Buc, Lawrence G., president, SLS Consulting, Inc., prepared statement

of ..................................................................................................................... 72

Burrus, William, president, American Postal Workers Union, AFL–CIO,

prepared statement of ................................................................................... 50

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 9

Davison, Hamilton, executive director, American Catalog Mailers Association, prepared statement of .......................................................................... 102

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 118

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts:

Prepared statement of ............................................................................... 4

Prepared statement of the National Newspaper Association ................ 32

O’Brien, James R., vice president for distribution and postal affairs,

Time Inc., prepared statement of ................................................................ 94

Riley, Michael, professor, University of Maryland University College, prepared statement of ........................................................................................ 84

Robinson, Maura, vice president of pricing, U.S. Postal Service, prepared

statement of ................................................................................................... 13

Waller, John, director of Office of Accountability and Compliance, Postal

Regulatory Commission, prepared statement of ........................................ 22

(1)

THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION OF USPS WORKSHARE DISCOUNTS

AND PRODUCTS THAT DO NOT COVER

THEIR COSTS

WEDNESDAY, MAY 12, 2010

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

SERVICE, AND THE DISTRICT OF COLUMBIA,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 3:01 p.m., in room

2154, Rayburn House Office Building, Hon. Stephen F. Lynch

(chairman of the subcommittee) presiding.

Present: Representatives Lynch, Norton, Cummings, Kucinich,

Clay, Connolly, Chaffetz, and Bilbray.

Staff present: Jill Crissman, professional staff; Aisha Elkheshin,

clerk/legislative assistant; Williams Miles, staff director; Rob

Sidman, detailee; Dan Zeidman, deputy clerk/legislative assistant;

Howie Denis, minority senior Counsel; and Alex Cooper, minority

professional staff member.

Mr. LYNCH. Good afternoon. The subcommittee on Federal Workforce, Postal Service, and the District of Columbia hearing will now

come to order. I apologize for the brief delay. We had some roll

calls on the floor. But I would like to welcome our ranking member,

Mr. Chaffetz, and members of the subcommittee, all hearing witnesses and those in attendance.

In light of the financial difficulties confronting the Postal Service,

we have called today’s hearing to explore the current economic impact on various workshare discounts, and to examine whether

these pricing structures correctly incentivize mailers. The hearing

will also investigate the issues related to products that do not currently cover their costs. The chair, the ranking member, and the

subcommittee members will each have 5 minutes to make opening

statements, and all Members will have 3 days to submit statements for the record.

Again, welcome.

As you are undoubtedly aware, the Postal Service continues to

confront a dire financial situation. While the Postal Service has recently revealed some good news, that it is doing better than previously anticipated by some $1.2 billion, the organization is still on

track to lose approximately $7 billion by the end of this year. And

this will be on top of a cumulative loss of nearly $12 billion over

the previous 3 fiscal years.

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Much of the Postal Service’s recent financial difficulties can be

attributed to the rise of electronic communication and the corresponding dramatic decline in mail volume, as well as the nationwide economic downturn, and in some ways statutorily imposed

prefunding of future retiree health benefit obligations.

One of the most important tools that the Postal Service currently

has to deal with its financial difficulties is its enhanced pricing

flexibility as provided by the Postal Accountability and Enhancement Act. However, utilization of this flexibility has not been an

easy matter, as the Postal Service and others have noted. In the

given market environment, increasing rates must be justified, balanced and reasonable, since such changes could further accelerate

the pace of mail volume declines.

Recent reports and studies have identified several pricing areas

that should be revisited and further explored as opportunities to

generate more revenue. Today this subcommittee convenes to discuss pricing issues relating to workshare discounts and products

that are currently considered as not covering their costs. First,

with respect to workshare discounts, the Postal Regulatory Commission’s fiscal year 2009 ACD, their Annual Compliance Determination, found that 30 workshare discounts exceeded their associated costs. According to the PRC, 17 of these discounts were justified, while the remaining 13 were not properly justified and should

be realigned at the next general price adjustment. Toward that

end, I look forward to hearing from today’s witnesses on these particular discounts and other workshare-related topics, especially

given that approximately 80 percent of all USPS mail is now

workshared. With such a large portion of mail being workshared,

it is crucial that workshare discounts be priced to maximize revenue and efficiency of the entire postal industry, especially during

such bleak financial times.

In addition to discussing aspects of worksharing, which is the

amount of prep that is being done by mailers in advance of handing

the mail off to the post office, and also workshare-related discounts,

today’s hearing also touches on the subject of postal products

deemed not to cover their actual costs. Highlighted by both the

PRC’s Annual Compliance Determination and the Government Accountability Office’s April 12th report, the Postal Service lost, in

the aggregate, approximately $1.7 billion in fiscal year 2009 due to

some 14 postal products that are not covering their costs of delivery. Although some of these products might be appropriately priced

below cost for public policy reasons, many stakeholders have begun

to call for more accurate pricing of these mailings, especially given

the current financial status of the Postal Service. Toward that end,

the subcommittee looks forward to an informative discussion exploring the Postal Service’s pricing policies, approaches to data collection and utilization as it relates to products that have been

found to fall short in covering their actual costs.

Today’s hearing will provide us an opportunity to hear from the

Postal Service, the Postal Regulatory Commission, our mailers, affected unions, and well-respected economists and scholars on these

vital topics. It is my hope that the testimony and feedback we receive from today’s witnesses will provide the committee with information on the value of these important programs in a post-Postal

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Accountability and Enhancement Act environment that incentivizes

the Postal Service to make a profit and to alter its business model

in order to meet the current and future challenges.

Again, I thank you each of you for being with us this afternoon,

and I look forward to your participation.

[The prepared statement of Hon. Stephen F. Lynch follows:]

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Mr. LYNCH. I now yield 5 minutes to the ranking member, Mr.

Chaffetz, for an opening statement.

Mr. CHAFFETZ. Thank you, Mr. Chairman. I appreciate holding

the hearing, and to all the witnesses who are here today, I appreciate your patience in waiting for us after roll call votes, and I appreciate your testimony here today and taking the time and preparation for it.

It’s my understanding that the U.S. Postal Service is expecting

to file an exigency rate case in July, and so this hearing’s timing

is significant.

The world of worksharing discounts provided to businesses which

perform duties that the Postal Service would have to otherwise perform and cost attribution of postal products is extremely challenging. On a basic level it is understood that worksharing discounts

should only be as big as cost savings provided, and that the postal

products should be covering their attributable costs. It is also

equally understood, however, that the methodology for determining

attributable costs is far from an exact science. Many of these

money-losing products are not stand-alone pieces of mail, but are,

in fact, responsible for a great deal of additional postal communication and consequently revenue. This is the danger of taking certain

products in isolation.

We must also bear in mind that products are only worth what

the market is willing to pay. One cannot make the assumption that

volume will stay the same as the price of the product is increased.

This price sensitivity is something that we need to dive deeper into

and must be studied very carefully. Hopefully this will be done

leading up to the review of the rate case.

Additionally, discussions of attributable costs are incomplete

without a few facts regarding institutional costs, which are paramount in this case. Obviously, in every finance class there usually

is spent time addressing the potential dangers of eliminating programs, outlets, or products that are not profitable. When these programs or products are discontinued, the institutional or fixed costs

that were originally allocated to the shut-down program get redistributed to the remaining products, which makes products that

were previously barely profitable suddenly notprofitable. I hope

that the agencies understand this. This does not mean unprofitable

programs can’t be shut down, but it means you have to understand

the total financial implication and not just the cost savings in that

bubble.

It also means that the U.S. Postal Service itself in this case must

analyze its own efficiencies. While the U.S. Postal Service may be

the most efficient postal system in the world, the truth is that

there’s no postal system like this anywhere in the world.

This hearing could help establish some very basic building blocks

for knowledge on these extraordinary complex issues. I would caution against jumping to conclusions over what we hear today. The

world of rate setting and adjusting has massive implications for the

trillion-dollar mailing and paper industries, and any congressional

intervention must be done with great caution.

With that, we look forward to this hearing, and, again, I appreciate the witnesses for their time and preparation today.

With that, Mr. Chairman, I yield back.

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Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from Virginia, Mr.

Connolly, for 5 minutes for an opening statement.

Mr. CONNOLLY. Thank you, Mr. Chairman. And thank you for

your leadership in helping us to restructure the Postal Service and

for conducting a thorough investigation of options for cost savings

and revenue enhancement.

This hearing will examine workshare discounts and posted pricing for certain products that do not cover the cost of delivery. The

Postal Regulatory Commission has investigated the Postal Service’s

workshare program and found that 30 workshare discounts are actually costing as much as they save, meaning that the Postal Service could be reducing losses by adjusting those discounts. This represents an opportunity to achieve cost savings without service cuts.

PRC also identified 61 workshare discounts that are profitable

for the Postal Service. In other words, the discounts for these

workshares are less expensive than the cost the Postal Service

would otherwise incur by processing the mail itself.

Though some have condemned the practice as well as the underlying statute that permits the Postal Service to earn profits on

these workshares, it seems to me we ought not to necessarily be

discouraging the Postal Service from seeking more opportunities

like these to make a profit when it’s losing so much money. There

is no inherent virtue in creating a workshare discount that precisely matches the cost of the Postal Service processing the mail

itself. In fact, it’s conceivable that the Postal Service could earn a

profit through less discounted workshares by setting a price that

still saves cost for private sector partners participating in

workshare.

We should protect the Postal Service’s ability to make profits on

workshares, while supporting the PRC’s oversight to ensure that

the Postal Service is not losing money on workshares. Although the

workshare program was intended to be temporary, if the Postal

Service can use it to achieve efficiencies, it should not be curtailed

or eliminated at this time.

Pricing for periodicals and mail flats represent another opportunity to increase Postal Service revenue. In 2006, Congress imposed a price cap on all classes of mail, which is linked to the Consumer Price Index. We should consider revisiting that cap to allow

the Postal Service to reduce losses associated with mailing magazines and mail flats on catalogs. With these two product categories

alone losing over $1.2 billion in fiscal year 2009, we need to provide

authority to adjust prices as part of a broader Postal Service restructure. It’s unrealistic to expect the Postal Service to function

like a business when Congress has imposed pricing restrictions

that do not apply to private sector businesses and competition.

Again, I want to thank you, Chairman Lynch, for your ongoing

leadership to identify policy options for Postal Service restructuring. Based on today’s hearing, I believe it’s clear that the Postal

Service should maintain its authority to make profits for

workshares and to receive additional authority to adjust certain

mail prices to avert losses for magazines and mail flats. And I look

forward to the testimony.

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Mr. LYNCH. I thank the gentleman.

[The prepared statement of Hon. Gerald E. Connolly follows:]

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Mr. LYNCH. It is the custom before this committee that all witnesses to provide testimony shall be sworn. Could I ask you both

to rise and raise your right hands.

[Witnesses sworn.]

Mr. LYNCH. Let the record show that each of the witnesses has

answered in the affirmative.

I am going to now just offer a brief introduction of our witnesses.

Ms. Maura Robinson was named vice president of pricing at the

U.S. Postal Service in June 2008. In this role Ms. Robinson is responsible for the pricing of all postal and nonpostal products and

services and for providing analytical support and evaluation of all

contract pricing and new product initiatives.

Mr. John Waller is a director of the Office of Accountability and

Compliance of the Postal Regulatory Commission. Mr. Waller leads

the Commission’s analysis of Postal Service pricing proposals and

oversees technical support for studies including measurement of

the Postal Service’s performance and impact assessment of major

Postal Service network reorganizations.

Each of you will have 5 minutes for an opening statement. When

you see the light turn red, you should probably wrap up.

Ms. Robinson, you’re now recognized for 5 minutes.

STATEMENTS OF MAURA ROBINSON, VICE PRESIDENT OF

PRICING, U.S. POSTAL SERVICE; AND JOHN WALLER, DIRECTOR OF OFFICE OF ACCOUNTABILITY AND COMPLIANCE,

POSTAL REGULATORY COMMISSION

STATEMENT OF MAURA ROBINSON

Ms. ROBINSON. Good afternoon, Mr. Chairman and members of

the subcommittee. Today I will discuss the Postal Service’s approach to setting prices, the impact of the Postal Accountability——

Mr. LYNCH. Could you pull the mic closer?

Mr. CONNOLLY. We cannot hear you.

Ms. ROBINSON. Today I will discuss the Postal Service’s approach

to setting prices, the impact of the Postal Accountability and Enhancement Act of 2006, and our workshare discount philosophy.

The Postal Act of 2006 enabled the Postal Service to bring new

products and services to market more quickly. The additional pricing flexibility helps us better manage our products and services

and make them an even greater value in the marketplace.

The new postal law provided different pricing rules for mailing

and shipping services. Prices for mailing services may not exceed

the rate of inflation based on the Consumer Price Index for the previous 12 months for any class of mail, while price changes for shipping services must produce sufficient revenue above a price floor

that covers attributable costs for each competitive product.

Last year the Postal Service announced that mailing service

prices would not increase in 2010. Due to the severe economic recession and the electronic diversion of mail, volume has dropped

drastically, and we were concerned that a price increase would further contribute to this decline. Instead, to generate additional revenue and stimulate mail growth, the Postal Service implemented

pricing incentives, seasonal sales, and a flat rate shipping option.

Overall our goal was to foster a long-term pricing strategy that proVerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE
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motes an efficient and cost-effective postal system, and to promote

mail volume retention and growth through pricing and product innovations.

We must use postal pricing as a tool to encourage customers to

stay in the mail. The mail has great power to deliver customer

value and has a demonstrated ability to help customers grow their

business. After experiencing a year in which we lost an unprecedented 25 billion mail pieces, the Postal Service’s current focus

must be on retaining and growing volume. We know that our largest customers are increasingly more likely to mail less if postage

prices increase.

Among our financial challenges are products that fail to cover

their attributable cost. This is clearly a cause for concern. No business can afford to lose on an ongoing basis billions of dollars on a

few products. However, by the same token, no business can afford

to take short-term actions that will create long-term irreparable

damage to customers. Improving the financial contribution of

money-losing products requires focus on both the revenues generated by the product through the prices charged as well as the

cost of providing the product.

Recently we announced that we intend to increase prices moderately in early 2011 using the exigent price change mechanism

provided in the PAEA. However, as we move forward, we are working to strike a balance between addressing cost-coverage issues and

maintaining our customer base. There are no easy solutions. Prices

for below-cost products will be increased to address the cost challenges; however, we intend to do so in a judicious and measured

way to improve financial performance over time.

The Postal Service has long offered its customers choices through

its worksharing program. If a customer presorts and prebarcodes

mail, transports it closer to its ultimate destination, or performs

other functions that reduce the Postal Service’s costs, they pay a

lower price based on the cost the Postal Service does not incur.

Workshared mail is among our most profitable mail. The cost

coverage for workshared first-class mail letters was 291 percent in

fiscal year 2009, the highest for any product. For each dollar the

Postal Service spends to process, transport, and deliver workshare

first-class mail letters, we receive almost $3 in revenue.

When a discount is discussed in pennies, it’s easy to portray

changes as minor; however, when you view those pennies in terms

of the postage actually paid by our customers, a clearer view of the

effects of changes in workshare discounts emerges. A 1-cent increase in prices translates to an average of $9 million in additional

postage annually for each of our five largest customers. In an environment of tight budgets, cost cutting, and ample alternatives to

the use of the mail, the potential effect of additional expenditures

of this magnitude could be severe.

A viable Postal Service can only exist if we offer prices and products that are good customer value. Over the last 30 years, stamp

prices have increased at about the rate of inflation and remain a

true bargain in today’s world. Our mail system cannot survive unless it remains affordable for everyone. If today’s actions shortsightedly accelerate the pace of electronic diversion and the search

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for alternatives to the mail, it will be difficult to continue to provide the American people with the postal services that they need.

In closing, during tough economic times we continue to achieve

record-level cost reductions, maintain high service level, and attain

successes with new initiatives for incremental revenue generation.

I’d be pleased to answer any questions that you may have.

Mr. LYNCH. Thank you. Thank you, Ms. Robinson.

[The prepared statement of Ms. Robinson follows:]

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Mr. LYNCH. Mr. Waller, you’re now recognized for 5 minutes.

STATEMENT OF JOHN WALLER

Mr. WALLER. Thank you. Thank you for the opportunity to be

here today.

Appropriate pricing can sustain operations and provide postal

services for the Nation. To help generate new revenue, the Commission has already approved 40 Service-proposed pricing initiatives this fiscal year, while providing the transparency and review

required by law. This builds on the long tradition of the Commission working with the Postal Service and mailing community to develop workshare discounts that over the years have increased volume, revenue, and, most importantly, net revenue.

That experience was incorporated into current law when

worksharing discounts were defined as being provided to mailers

for the presorting, prebarcoding, handling, or transportation of

mail, as further defined by the Postal Regulatory Commission.

When mailers perform one or more of these functions prior to mailing, the Service can avoid certain transportation and mail processing costs. If workshare discounts equal avoided costs, then other

mailers are not disadvantaged, and the Service retains the same

unit contribution to institutional costs.

But when discounts exceed avoided costs, contribution can be

lost, and a mailer has price incentives to perform postal functions

that the Service can perform at a lower cost. The PAEA explicitly

requires the Commission to ensure that this does not occur unless

certain specified exceptional circumstances exist.

The difficult computational task is to identify the cost of handling mail that is similar except for being workshared. As an example, consider a first-class letter mailing that satisfies automation

requirements and is presorted to the five-digit ZIP code level. The

average Postal Service unit cost for processing and delivering this

mail is 8.7 cents. However, without presorting and other workshare

requirements, the cost is 18.2. The 9.5 difference is the avoided

cost.

Methodologies for determining avoided costs have been developed

over the years and continue to be refined through public hearings,

with input from the Postal Service and other interested parties.

Current avoided costs are determined each fiscal year as part of

the Annual Compliance Determination process to ensure timely detection of discounts that are too large and need to be realigned.

As noted by the chairman, for fiscal year 2009, the Commission

found that 13 worksharing discounts exceeded avoided costs and

were not justified by the Service, with exceptions outlined in the

PAEA. The Commission has determined that the best time or most

appropriate time to realign these 13 questionable discounts is the

upcoming exigent rate case.

Last year the Service had a loss of $3.8 billion with $1.7 billion

due to 14 market-dominant products that did not cover their attributable costs and contribute to the institutional costs; $1.5 billion

came from periodicals, standard mail flats, and standard mail

nonflat machinables and parcels. All of these products involved

flats for which the Postal Service has a longstanding cost-control

problem.

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Standard mail flats were given less-than-average increases for

the last 2 years, and there has been a rapid increase in losses from

that product, with a near tripling in 2009. While this pricing strategy has been given an opportunity to succeed, the Commission has

cautioned against continued less-than-average increases for lossmaking products without a plan for how net revenue is helped over

the long run. First-class and bound printed matter flats do cover

attributable costs, so the standard flat mail losses are not an

unsolvable problem.

Standard mail nonflat machinables and parcels received significant price increases of 16.4 percent last May and 9.7 percent the

year before, well above the average, but more work is needed to

fully align revenue and costs.

Periodical has not covered its attributable costs since 1997. The

Commission and the Postal Service have a study underway to find

out what some of the chronic costs and revenue imbalance causes

are. It should be completed this year and sent to the Congress for

consideration.

The Commission has emphasized that financial difficulties to the

Service is a multifaceted problem, not just a matter of piece—of the

prices, but of operating costs, legacy costs, business model and a

changing mail market. As solutions are sought, the Commission is

responsible for providing transparency on revenue and costs.

Thank you.

Mr. LYNCH. I thank the gentleman.

[The prepared statement of Mr. Waller follows:]

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Mr. LYNCH. Let me just—I will yield myself 5 minutes for questions, but before I do, why don’t we do this: Before I move to questions and begin my time, I would like to ask unanimous consent

that the statement from the National Newspaper Association,

which highlights their concerns over postal pricing for in-county

newspapers, be included for the record.

Hearing no objection, so ordered.

[The information referred to follows:]

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Mr. LYNCH. All right. Just so this doesn’t get too technical, I

want to, first of all, try to offer a little bit of an explanation to the

folks who are unfamiliar with this process about workshare.

Workshare simply refers to the portion of work that mailers conduct when they bring their mail—before they bring their mail to

the post office, and that can involve presorting. If a mailer has a

lot of mail, and they bring it to the post office and it’s presorted,

it can be barcoded, it can be bundled in ZIP codes and actually

transported privately to the Postal Service rather than picked up

so that private mailers are doing a lot of work that the Postal Service might have otherwise done, and that’s what we call workshare.

And the idea of these discounts is really trying to determine what

the value of that presorting, bundling, delivery, barcoding, the

things that they have done for the Postal Service to make the delivery more efficient. And so we try to give them a discount that exactly matches the service that they have provided.

The problem begins when on the one hand sometimes we overcompensate the mailers. We give them more of a discount than the

value of the services that they provided, which ends up in a boon

or a windfall, some say, to the mailers and an inefficiency or a lack

of valuing of the service provided by postal employees. On the other

hand, sometimes we shortchange our mailers, and we don’t give

them enough of a discount, and in that instance you actually have

an antitrust problem or a situation where the Postal Service is actually retaining revenue or taking advantage of the mailers.

So that’s where we have these differences. And hopefully that’s

a little bit clearer than just using terms like ‘‘workshare’’ and ‘‘cost

avoidance’’ and other things like that.

Let me ask you, during the Postal Service’s March 2, 2010, announcement of its new business plan, the post office stated that

their goal was to have all products covering their costs. Now, we

have several general categories of mail that actually cost more to

deliver than what we charge, and so those products do not meet

the cost of delivery based on the rates that we charge. How do you

plan to meet your goal of having all products covering their cost by

2020 based on the situation we have right now?

Ms. Robinson.

Ms. ROBINSON. As I’ve indicated, there are problems with some

of our products that do not recover our costs, and that’s not a situation that is sustainable for any organization. The Postal Service is

looking at all alternatives to grow mail volume, to increase our revenue from those products, and to operate with those products as efficiently as possible. More practically we’re going to be addressing

the pricing issues through, in part, an exigent price increase which

will be filed later this year in which we intend to have a moderate

price increase that will in part address the cost challenges within

products such as standard mail, flats, and periodicals.

Mr. LYNCH. OK. Let me interrupt there. So we have flats, which

you’ve got magazines and catalogs, things like that, that are not

currently paying for themselves. We’re subsidizing the delivery of

those products. They’re awkward, but large; they’re odd sizes. Then

give me another area where we are mispricing.

Ms. ROBINSON. The three largest categories where you’re not covering costs would be periodicals, magazines and newspapers.

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Mr. LYNCH. Right.

Ms. ROBINSON. Standard mail flats, which is typically catalogs

and other large paper-size pieces of advertising mail, and standard

mail parcels, which are lightweight parcels weighing under——

Mr. LYNCH. How are we going to bring those up to a category

where they pay for themselves?

Ms. ROBINSON. We’re looking at increasing the product prices

over time. We are going to be doing it in a measured way over approximately a 10-year horizon.

Mr. LYNCH. All right.

Ms. ROBINSON. However, we do need to address the customers’

concerns that we don’t severely damage their businesses by price

increases that are too large.

Mr. LYNCH. Let me ask you—and my time is running out. You

say in your testimony that through this exigent pricing or emergency pricing adjustment that we’re going to do in 2011 that you’re

going to institute a, ‘‘moderate increase.’’ Give me a hint on what

you mean by ‘‘moderate.’’ Is there a percentage that you can attach

to that or something that I would be able to divine what the cost

might be as opposed to being moderate?

Ms. ROBINSON. The Postal Service’s Board of Governors is going

to make that decision, and we’re looking at balancing the impact

on our customers versus the Postal Service’s need for additional

revenue and to address the cost challenges.

Mr. LYNCH. Do you have a moderate range? Can you give me a

range of between what and what, what that might cost, or are you

afraid of scaring people?

Ms. ROBINSON. That’s a decision that’s going to be made by the

Postal Service’s Board of Governors, and they’ve not made that decision yet.

Mr. LYNCH. OK. I’ve used up all my time.

The chair now recognizes the gentleman from Utah Mr. Chaffetz

for 5 minutes.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

Ms. Robinson, you say in your testimony here, if I’m reading it

right—at least on page 5 of the copy that I have here, it says:

‘‘Workshare mail is profitable. There are many myths about

worksharing, including an oft-cited observation that if discounts

are greater than avoided costs, then it must be profitable. Nothing

could be further from the truth. Despite the sometimes vocal rhetoric, workshare mail is among the most profitable mail for the

Postal Service to handle.’’

So you cited three areas where you say it’s not profitable, and

yet in your testimony you also say it’s very profitable. What are

those areas where maybe we’re not giving enough discount? You

cited three where we’re maybe going the opposite direction, but

what are we overcharging for?

Ms. ROBINSON. Well, I’m not sure I would characterize it as overcharging. For example, in workshared first-class mail letters, typical pieces, bills, statements, correspondence you would receive from

other businesses, the cost coverage——

Mr. CHAFFETZ. But we’re not giving them enough discount; is

that what we’re saying? Because as the chairman pointed out,

there are some legal implications for not passing it along, and if

37

you’re citing things that are saying, well, these are unprofitable,

but the overall category is very profitable, what are those areas,

specific items, that you’re not giving enough discount for?

Ms. ROBINSON. I would not characterize it as not giving enough

discount. The discounts are greater—greater than the avoided cost,

which is one factor to consider. We’re also evaluating the net contribution of, for example, first-class mail letters, which is very high,

and the potential effect on customers if we reduce the discounts, effectively increase the prices for those customers. Categories such as

standard mail flats, which are some—a fairly workshared category,

do have fundamental cost challenges that we’re addressing for

operational——

Mr. CHAFFETZ. Are there specific categories, specific pieces of

mail that we’re not giving enough of a workshare discount to?

Ms. ROBINSON. I think there are specific categories of mail where

we need to very seriously consider the effects of——

Mr. CHAFFETZ. You can’t name any right off the top of your head

right now? Because you’ve named some that you felt like—you

know, periodicals and that sort of thing.

Ms. ROBINSON. I think the first-class mail is a category where we

have high profits. It’s a very profitable source of mail for the Postal

Service. I would not characterize the discounts——

Mr. CHAFFETZ. And you won’t be seeking a rate increase in those

categories, correct?

Ms. ROBINSON. No. When we look at increasing prices through

the exigent price mechanism, we will be looking at increasing

prices for all mail.

Mr. CHAFFETZ. Even if it’s in that most profitable area?

Ms. ROBINSON. Yes. First-class mail is contributing about 70 percent of the contribution to the institutional costs of the Postal Services. Given the Postal Service’s financial condition, we can’t afford

not to increase the price of that mail as well as the prices of other

categories.

Mr. CHAFFETZ. If the volume had stayed the same, would we be

having the same discussion, or is it directly related to volume?

Ms. ROBINSON. It is in part related to volume and to the pressures in the industries in which our first-class mailers do business,

but given the financial pressures on the Postal Service, we believe

that we——

Mr. CHAFFETZ. But I’m saying those financial pressures, if the

volume had remained the same—and I understand and appreciate

that we’ve taken a precipitous dip. If they had stayed the same,

would we be having the same discussion? Would there need to be

this discussion happening?

Ms. ROBINSON. I think if the volume had remained the same, the

financial circumstances facing the Postal Service would obviously

be substantially——

Mr. CHAFFETZ. Would we still be upside down, do you think, or

in the red?

Ms. ROBINSON. If the volume had remained the same, there are

some pressures on the Postal Service financially associated with retiree health benefits and some other fundamental issues, with at

least the secular decline associated with electronic diversion. If the

volume remained the same, I think the Postal Service would be

38

moving forward on a typical schedule for price increases under the

price cap.

Mr. CHAFFETZ. One of the things, Mr. Chairman, that I still

struggle with is clearly in your testimony and just the basic economics, you say raising prices will reduce volume.

Ms. ROBINSON. Yes.

Mr. CHAFFETZ. But you also say at the same time one of the biggest challenges or opportunities, if you will, for the Postal Service

is to increase volume. And that’s where there’s a disconnect that

I just worry about, the accounting of how we try to go and institute. It’s the basic question. It’s the multibillion-dollar question. I

realize how difficult it is to come to the conclusion.

Mr. Waller, I’ve only got seconds here, but is there anything you

would like to address in the questions I asked? I’m sorry I

didn’t——

Mr. WALLER. Yes. In the ACD, if you look in chapter 7, there’s

a list of all the products that are either above or below or equal

to avoided costs.

Mr. CHAFFETZ. And is there anything in that list that you think

arises above and beyond what the legal prescription is for——

Mr. WALLER. Well, there are those that are greater than 100 percent, and that’s the legal prescription that is in the PAEA.

Mr. CHAFFETZ. But there are some that are in excess of 100 percent.

Mr. WALLER. Yes, there are. There were the 14 that we identified, and they are—yes, and there are some big volumes there, too.

Mr. CHAFFETZ. Thank you.

Mr. Chairman, I just ask unanimous consent to enter into the

record a Congressional Research Service report entitled, ‘‘Postage

Subsidies for Periodicals, History and Recent Developments,’’ dated

January 22, 2009, and I would like to add that to the record.

Mr. LYNCH. Without objection, so ordered.

Mr. CHAFFETZ. I yield back the balance of my time. Thank you.

Mr. LYNCH. The chair recognizes the gentleman from Virginia,

Mr. Connolly, for 5 minutes.

Mr. CONNOLLY. Thank you, Mr. Chairman.

We just had a discussion about the fact that the pricing of certain items, magazines, catalogs, might raise antitrust issues. Making a profit rather than taking a big loss might raise antitrust

issues. Has that issue ever been adjudicated?

Ms. ROBINSON. Not to my knowledge.

Mr. WALLER. And I think the area of concern is in the

worksharing discounts. If it’s equal to 100 percent, you’re sort of

neutral on the—whether the Postal Service does it or competitors.

Now, a lot of businesses have come into existence like

consolidators, and they do—they make their money by doing the—

getting lots of mailers’ mail together and doing it cheaper than the

Postal Service, sharing that with the mailer, and they depend upon

a fair discount in order to stay in existence. So I think that’s where

some of the charges you set—a competitive world has been set up

in mail processing and if that gets restricted. Now, the Commission

has not been involved in any decisions on that I’m aware of

and——

39

Mr. CONNOLLY. It just seems to me that when we’re losing $7 or $8 billion a year of taxpayer money, frankly revisiting some of

those assumptions and some of those nice things to do for competition might be in order, because our first obligation isn’t to private

sector competition; while we welcome that, it is to the taxpayers

who are ending up helping to subsidize——

Ms. ROBINSON. I’d just like to——

Mr. CONNOLLY [continuing]. These losses.

Ms. ROBINSON. I’d just like to point out that the Postal Service

does not receive taxpayer dollars. Our revenue comes from the

postage that our customers pay.

Mr. CONNOLLY. All right. Those customers are our constituents,

and they are still subsidizing those losses. Otherwise, you wouldn’t

periodically, when we have hearings like that, be bringing those

losses to our attention and the need for urgent action.

Your testimony, Ms. Robinson, notes three products—periodicals,

mail flats, and standard mail parcels—fell short of covering their

cost by $1.4 billion last year. The PRC’s most recent Annual Compliance Determination cautioned against less-than-average price increases for loss-making products without a plan for increasing net

revenue in the long run. Does the Postal Service currently have a

long-term plan to ensure that those products increase in that revenue?

Ms. ROBINSON. Yes. The Postal Service is developing a long-term

plan to address those issues. We are going to be increasing the

prices of the products that are not covering their costs in a measured way to address the issue, while maintaining the—limiting the

effect on the customer base.

Mr. CONNOLLY. So you’re working on a long-term plan.

Ms. ROBINSON. We are developing a long-term plan that will include a price increase using the exigent price mechanism that will

be filed with the Postal Regulatory Commission later this year.

Mr. CONNOLLY. Any idea when we might expect to see that longterm plan?

Ms. ROBINSON. That will be up to the decision of the Board of

Governors. We should be seeing it relatively shortly.

Mr. CONNOLLY. Relatively shortly. OK.

The chairman talked about the workshare discounts, and again,

the PRC in its Annual Compliance Determination found that 30 of

those workshare discounts exceeded their avoided costs, 17 of them

justified under statutory exceptions, 13 not justified. How do we intend to go about correcting those 13?

Ms. ROBINSON. The Postal Service believes it justified the

workshare discounts that exceeded avoided costs largely based on

the potential effect of the efficiency of the Postal Service——

Mr. CONNOLLY. I’m sorry, Ms. Robinson. I cannot hear you.

Ms. ROBINSON. I’m sorry. The Postal Service believes it justified

those discounts based on the efficiency exception within the statute. Reducing those discounts, effectively increasing the prices for

those products, would cause a reduction in volume that we are concerned would substantially reduce the volume to our system and

hamper the efficiency of the system. So we believe we’ve addressed

the issues surrounding those discounts.

Mr. CONNOLLY. Thank you.

40

Mr. Waller, I’m going to run out of time, so let me ask quickly,

in general how often ought rate adjustments be made to realign

avoided costs with the workshare discounts?

Mr. WALLER. Well, they’re on—we’re on sort of a yearly cycle now

because that’s the way the costs come together. Very expensive to

find out what each product costs, what each activity costs, and

there are a lot of surveys and things that go on. So we’re sort of

tied into an annual cycle, and that probably is appropriate because

you will catch it before it goes on too long.

Last year the—at the beginning of the year, there were a lot of

the discounts that were exactly equal to 100 percent. Actual mailprocessing costs dropped, and therefore the discounts were too

large then. It was caught this year, and the adjustments can be

made in this next rate case.

Mr. CONNOLLY. Thank you, Mr. Chairman.

Mr. LYNCH. Thank you.

The chair now recognizes the gentleman from Maryland, Mr.

Cummings, for 5 minutes.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

First of all, thank you all for being here today, and I just want

to—Dr. Riley, whom we’re going to hear from in the next panel,

says that—in his testimony, he says that ‘‘in the 1990’s, management began to view the primary customer of the post office as the

larger mailer instead of the individual customer. These representatives focus on obtaining discounts for their clients, the large mailers, and/or converting first-class mail to less expensive categories

of mail.’’

I wanted to give you all a chance to respond to that. What do

you think of that? Do you agree with him?

Ms. ROBINSON. During the 1990’s, we did see a substantial

growth in commercial mail in what would be considered to be the

workshared categories. That was in part in response to incentives

that the Postal Service put forward through the workshare discount program. That mail helped to drive the automation program

in the Postal Service that kept costs low for all customers, including the individual household customer. So there’s been a large expansion of the efficiency of the Postal Service that has been in part

enabled by the existence of very high-quality, clean mail that efficiently runs in operations that helps to keep the total cost of processing mail down.

The Postal Service looks at the typical household mailer as very

important to us. That’s our fundamental customer base, and we’re

very interested in preserving the mail for the typical household

customer, and in part we need to do that by preserving the financial stability of the Postal Service and managing our pricing and

product structures for commercial customers so they stay in the

mail, to enable the typical household customer to continue to be

able to have a viable Postal Service for the future.

Mr. CUMMINGS. Mr. Waller, do you have a response to that?

Mr. WALLER. Yes. The importance of having the discount equal

avoided cost is that it doesn’t put the burden of the discount on the

small mailer—on the individual mailer. No other mailer has to pick

up that extra institutional cost that might be given away by having

a discount larger than the avoided cost. I think that’s why it got

41

put in the act, so that the Commission should ensure that doesn’t

occur. That’s the way to protect not only the small single-piece

mailer, but all the other mailers in the system, too.

Mr. CUMMINGS. Mr. Waller, you testified that the Postal Service

has had longstanding cost-control problems with the handling of

mail flats, is that right?

Mr. WALLER. Yes.

Mr. CUMMINGS. And would you give me a little bit more explanation on that?

Mr. WALLER. Well, the reason I say ‘‘longstanding’’ is back when

I was first kind of with the Commission in 2000, the—it was tracking the costs, and periodicals were still going up at that time, and

they were mainly flats. So the Commission said, Postal Service,

send over some witness, explain what’s going on. And basically

what was happening was that the automation or mechanical processing equipment wasn’t really helping that much. A lot was still

being manually sorted, and the promise was, well, we’ve got a new

system coming, the AFSM–100. It did help a lot, but still those

costs seemed to spiral out with too much manual sorting and too—

too expensive handling costs on the flats.

Now the answer is supposedly in the FSS, but we’ll have to see

the flats sequencing system, if that actually produces any savings.

It just has maintained itself as the high cost of handling flats. It

hasn’t gotten a handle on it yet.

Mr. CUMMINGS. Now, you also state that due to the continual

changes in the postal operations, it’s necessary to periodically review how workshare costs are developed. And who conducts those

reviews?

Mr. WALLER. The Commission does. The—we have order—or procedures for what data the Postal Service is to provide so we can

track those costs. And as I said a moment ago, what happened in

2009, some of those avoided costs, the Postal Service found a way

to perform them in a less expensive way. So the costs avoided were

less, so, therefore, the discounts should be dropped and appropriately adjusted. And it’s on that ground that you have to continually look at that, because if suddenly something becomes operational, some magical way of processing, you want to build that in

as costs are less now, less give, less discounts.

Mr. CUMMINGS. I see my time is up. Thank you, Mr. Chairman.

Mr. LYNCH. I thank the gentleman.

The chair now recognizes the distinguished gentleman from Missouri, Mr. Clay, for 5 minutes.

Mr. CLAY. Thank you, Mr. Chairman, and thank you for conducting this hearing.

Ms. Robinson, we recently held hearings in this committee regarding the Postal Service’s uncertain financial future. In your

opinion, how much do issues with workshare discounts factor into

the Service’s financial woes? Any contributing factors?

Ms. ROBINSON. Clearly you need to evaluate all pricing in relation to the Postal Service’s financial position. I’d like to observe for

the majority of first-class mail workshare, which is most of the

workshare mail, we are actually making 5 cents more per piece for

that mail than we do on single-piece mail. This is highly profitable

mail, and continuing that workshare program is very important for

42

the Postal Service. Some categories that are cost-challenged, such

as standard mail flats, are very heavily workshared. We’re looking

at addressing those issues over time.

Mr. CLAY. OK. It has been reported that the Postal Service predicts the rate increase being proposed through the exigent circumstances appeal is moderate. Can you elaborate on this assessment?

Ms. ROBINSON. The Postal Service’s Governors are evaluating the

current situation, and are going to be making a decision on the size

of the increase. That will be announced in the near future. At the

moment we do believe the circumstances facing the Postal Service

meet the exigent conditions. They are extraordinary. These are

really dramatically challenging financial times for our customers.

Mr. CLAY. So do you think there will be a rate increase and it

will make up for the difference?

Ms. ROBINSON. As we announced on March 2nd, we are planning

a rate increase in early 2011.

Mr. CLAY. OK. In July 2009, the Postal Service filed a request

with the PRC to alter their revenue analyst method. Can you explain what this methodology has to do with workshare costs and

the Postal Service’s financial viability?

Ms. ROBINSON. The revenue—I’m sorry?

Mr. CLAY. It’s called the—they filed a request with the PRC to

alter their revenue analysis methods. You’re not familiar with

that?

Ms. ROBINSON. I’m——

Mr. CLAY. OK. Well, I will go on to the next question, then.

Mr. Waller, can you respond to that?

Mr. WALLER. Oh, well, last year we talked about how you have

to relook at these costs all the time. The Postal Service last year

filed 30 different requests for modification, the way costs are calculated. Twenty-nine of those, in fact, were approved. One was denied. But—so that’s an ongoing process. But they came in through

the year, some of them in July, some of them earlier and later.

Mr. CLAY. OK. A question for either one, and both of you can

tackle it if you would like. How much do products which do not

cover their attributable costs factor into the financial hardships of

the Postal Service? How much of that adds to your deficit?

Ms. ROBINSON. In fiscal year 2009, the products that did not recover their costs cumulatively lost $1.7 billion.

Mr. CLAY. And the overall loss to the Postal Service was how

much?

Ms. ROBINSON. About $3.8 billion.

Mr. CLAY. OK. So it was almost a half or——

Ms. ROBINSON. Yes.

Mr. CLAY. Or over a half.

Go ahead.

Ms. ROBINSON. Pardon me?

Mr. WALLER. No. I agree with that. And not only did they not

cover their costs, then they did not create an extra contribution to

the institutional cost, which is part of the act, too. They’re supposed to make a reasonable contribution to institutional costs. So

those products actually had a larger impact.

43

Mr. CLAY. OK. How can workshare issues be addressed overall

to ensure that the Postal Service gets maximum productivity? How

do we address that, Mr. Waller?

Ms. ROBINSON. When we look at our customers, we need to look

at what they’re using the mail to do. We’re talking a lot in terms

of discounts, price differences between different categories of mail.

In reality our customers pay prices. They pay dollars out of their

pocket to mail, to accomplish their business objectives. As we look

at improving the financial condition of the Postal Service, we need

to keep the mail affordable for those customers.

We need to weigh the efficiency concerns around workshare discounts. We need to weigh the fact that our customers have a lot

of alternatives to the mail. The number of electronic possibilities

for sending a bill, a statement, the information that would be in

a newspaper or magazine is growing, and we need to consider that

as we price our products.

Mr. CLAY. Thank you.

Thank you, Mr. Chairman. I yield back.

Mr. LYNCH. Thank you. Let me ask you in light of the gentleman’s question, the $1.7 billion delta here in terms of products that do not support the cost

of delivery; so we’re losing money on certain aspects. I know that

Congress, very early after the establishment of the Postal Service

at the very birth of our country, made some conscious policy decisions back then that newspapers and periodicals, because they had

an informative dimension to them that served the public purpose—

this was back in the day when they did not have radio, they didn’t

have TV, they didn’t have 25 news stations, they didn’t have the

Internet. Congress made a decision back then as public policy that

we needed to subsidize newspapers and periodicals because that’s

how the populace was informed. That was the decision 200 years

ago.

Today you can click around, and it’s just nonstop news on every

single channel. You’ve got the Internet, all kinds of blogs and Web

sites and radio. You’ve got an abundance of sources for informing

the electorate, our citizenry.

In light of that change in technology and in our daily lives, are

we still justified in granting discounts to newspapers and periodicals, the cost of which is borne by others who are paying the freight

for those periodicals and newspapers? Do you think as a policy decision it remains justified?

Ms. ROBINSON. Over the history of the Postal Service, Congress

has made a number of decisions that have promoted the editorial

content within magazines and newspapers. For example, the periodical prices right now for mailing editorial content are much lower

than for the advertising portion of the mail. In the early to mid1990’s, a decision was made by Congress that periodicals should no

longer be directly subsidized through appropriations, and that

those—that product should cover its costs through the prices paid.

However, the public policy goals of promoting the dissemination of

information and news has been maintained through the pricing

structure of periodicals.

Mr. LYNCH. OK. I understand that. What I was asking you is in

light of the fact that we now have the Internet, we have radio, we

44

have TV that we didn’t have when we adopted that policy, can it

still be justified given the fact that other ratepayers, other mailers,

other customers of the Postal Service are subsidizing newspapers?

Ms. ROBINSON. The role of periodicals in American society is really one that is one of disseminating information. I think there’s a

lot of value of that to the American people. When we survey customers, folks that receive the mail, they get a lot of value and use

out of the mail from finding that periodical that they requested in

their mailbox. The periodical is one of the few things that people

actually pay to receive. That value in the mailbox is important for

the Postal Service to keep our customers interested in valuing the

mail that they receive.

Mr. LYNCH. I understand that. I guess we’re not really getting

at the question, though. There are a lot of good things that are out

there for people that are provided by the private sector without

subsidy. They actually pay for stuff, and they pay full price for that

item, for that information, for the Internet, radio, TV, and—but

this is a special category that we set out early on at the birth of

this country that we were going to subsidize through the Postal

Service, the dissemination of periodicals and newspapers, and I’m

just asking you as a public policy position whether that is still justifiable given the fact that there’s all kinds of other sources of information out there that are available to the public that serve this

purpose and are not subsidized by the Postal Service.

Ms. ROBINSON. The Postal Service is looking at adjusting periodicals prices so they do cover their costs. We’re concerned about the

potential effect on the periodicals industry. We did that all in one

step. At the end of the day, there is a public policy decision that

is framed and discussed in the terms that Congress has established

for periodicals pricing, which it does recognize in law the fact that

the educational, scientific and informational value of the mail is

important and needs to be considered within the prices we charge

for periodicals mailing.

Mr. LYNCH. Thank you.

Mr. Waller.

Mr. WALLER. Well, it’s in the law, and the Commission is focused

on, you know, following the law, and considering that it’s always

been—those factors have been there, I think that’s a policy decision

that Congress needs to address more than someone like the Commission.

But in some of our hearings we have had very lively debates

about this issue that you are talking about right now where the

various mailers, in fact, came to—with a complaint to the Commission that the—a few years ago that the pricing of periodicals was

not appropriate given all the changes that you’ve——

Mr. LYNCH. Look, in a perfect world I guess if we were making

boatloads of money at the post office, we probably wouldn’t be having this hearing, but I’m worried about the pension benefits, the

health care benefits for these workers, and just trying to stabilize

this system. And here is this somewhat of a luxury—I know we’ve

always done it this way, but times have changed enormously, and

the justification and the underpinnings for our policy have certainly eroded over time with the abundance of medium.

45

Mr. WALLER. The Commission, back the last time that we set

rates before the PAEA came into effect, made some fairly dramatic

increases in—or changes in the pricing structure to get what was

perceived as maybe a fairer sharing of the burden of the periodicals

costs among all the mailers there. It was sort of trying to address

things are changing, maybe the pricing structure does need to

change, and some were put into effect. They did have some negative impacts, and the Commission was criticized very heavily for

some of those decisions.

So I’d say the policy reasons are very alive out there for continuing this. The American public does seem to still want the special

treatment for this, at least several of the groups that participate

in this industry.

Mr. LYNCH. OK. I’ve overstayed my time.

The chair now recognizes the gentleman from Utah, Mr.

Chaffetz, for 5 minutes.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

Talking about nonprofit mailers if I could for a second, very similar to what the chairman was talking about, give me a sense of the

size and scope and the subsidies that really the American people

are making for nonprofit mailers.

Ms. ROBINSON. Nonprofit standard mailers typically pay 60 percent of the average revenue per piece of a—a commercial mailing

that would be similar. There are also discounts associated with

periodicals mailed, about a 5 percent discount. So there are preferences granted by statute for that mail.

Mr. CHAFFETZ. And either of you, what is the total subsidy that’s

coming from the American people? And isn’t there an appropriation

that actually is there to cover that cost, or does that just go to the

bottom line?

Mr. WALLER. That’s for the blind——

Ms. ROBINSON. Yeah. The only congressional appropriations that

we receive associated with providing mail is for free mail for the

blind and overseas voters.

Mr. WALLER. About half of that loss in standard mail that we

were talking about, standard flats, can be traced to the nonprofits.

Mr. CHAFFETZ. Dollarwise what would that be——

Mr. WALLER. Dollarwise. Dollarwise.

Mr. CHAFFETZ. What would be that dollar amount?

Mr. WALLER. About $300 and some thousand—$300 million.

Mr. CHAFFETZ. $300 million.

Mr. WALLER. I was looking for the exact number here. The loss

per piece on standard mail flats that are the commercial is 4.7

cents. It’s 22.4 cents for the nonprofit mail. So it’s taking a big hit,

and even though they’re a smaller percent of the volume, it comes

out almost equal, $311 million or something like that, or approximately that. We did put that number in the——

Mr. CHAFFETZ. When is the last time we did an analysis of what

would happen if we, you know, got rid of the subsidy or adjusted

the subsidy or however you want to frame it, but when’s the last

time that’s been reviewed? I’m new to this so I need some help

being pointed in the right direction to where specifically that is and

when—when is the last time we actually revisited that particular

portion of it.

46

Ms. ROBINSON. We did an analysis that was presented to the

FTC. I believe it was 2007 or 2008. The cumulative——

Mr. CHAFFETZ. Whatever it is, could you provide that to us?

Ms. ROBINSON. We can provide that for the record.

Mr. CHAFFETZ. I know it is hard right off the top of your head.

And it actually kind of scares me that you actually know that right

off the top of your head.

Ms. ROBINSON. Yeah. Basically the cumulative value of the nonprofit mail subsidies and the periodicals together was about $11⁄2

billion.

Mr. CHAFFETZ. OK. And of that, the nonprofit was—OK.

Ms. ROBINSON. I believe it was about half and half, so I don’t remember the exact numbers.

Mr. WALLER. I was talk talking about the flats. It was $311 million.

Mr. CHAFFETZ. OK. A significant enough number that I would,

Mr. Chairman, urge that we revisit and think that through as well,

because it is a huge, huge number. And there are many tax benefits that are offered for being a nonprofit, but the American people

have to subsidize that. However you want to frame that, I think

it is worthy of diving into and rediscussing at some point.

I yield back. I know we’ve got another panel that’s waiting, so

thank you for the additional time.

Mr. LYNCH. I thank the gentleman and I welcome his questions.

And I agree there are nonprofits and there are nonprofits. And

maybe we should look and see the amount of benefit that is actually derived to the public for each and every one.

Let me ask in closing, I know we talked about this exigent rate

case that’s coming up in 2011, do we have a timeframe on that?

And when should we—I know you’ve got a delicate balance here because of the potential shock value or shock impact of that rating

decision on a very fragile system here. So do you have at least a

timeframe in mind?

Ms. ROBINSON. Yeah, we would be looking at changing prices to

the exigent mechanism early in 2011. Under the statute, the Commission has 90 days to evaluate our request once that’s filed. And

we intend to leave an appropriate amount of time for our customers to actually implement that change. So we’re looking at

about 6 months lead time.

Mr. LYNCH. OK, thank you.

Mr. WALLER. And the Commission is committed to getting that

in 90 days, as required.

Mr. LYNCH. OK, well, that’s great. I want to thank you both. I

think you’ve suffered enough. Ms. Robinson, Mr. Waller, thank you

for your testimony, for helping the committee with its work. Have

a good day.

Could we ask the second panel to take their seats? Thank you.

Thank you and welcome to our second panel. Before we move to

questioning, as you know, the custom for this committee is to have

all witnesses sworn who are about to offer testimony. May I please

ask you all to rise and raise your right hands?

[Witnesses sworn.]

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Mr. LYNCH. Let the record show that each of the witnesses has

responded in the affirmative. I will now offer a brief introduction

of each of our panelists on our second panel.

Mr. William Burrus, is president of the American Postal Workers

Union. Mr. Burrus is also a member of the executive committee of

the Union Network International, a global federation of unions that

represent postal and other service workers.

Mr. Lawrence Buc is the president of SLS Consulting, Inc. SLS

is a Washington, DC, Consulting firm that specializes in postal economics and environmental analysis. Mr. Buc participated in rate

classification and complaint cases regarding the Postal Service for

35 years.

Dr. Richard Riley, is a professional—excuse me—is a professor in

the MBA and executive programs at the University of Maryland

University college where he teaches finance, economics and accounting to MBA candidates and executive MBA candidates. Previously Dr. Riley served as chief financial officer of the U.S. Postal

Service from 1993 to 1998.

Mr. James O’Brien, is vice president of distribution and postal affairs at Time Inc. and has been with Time since 1978. He is currently the chairman of Mailers Council and a member of the Magazine Publishers of America, Government Affairs, and Postal Committees.

Hamilton Davison has been executive director of American Catalog Mailers Association since its founding in April 2007. Mr.

Davison’s involvement in postal affairs began in 1992 with his

service on the Greeting Card Association Postal Affairs Committee.

Welcome all.

As you know, each of you will be given 5 minutes for an opening

statement. The lights will indicate green at the beginning, yellow

as you proceed, as you’re getting toward the end, and then red

when you should wrap up.

President Burrus, you’re recognized for 5 minutes for an opening

statement.

STATEMENTS OF WILLIAM BURRUS, PRESIDENT, AMERICAN

POSTAL WORKERS UNION, AFL–CIO; LAWRENCE G. BUC,

PRESIDENT, SLS CONSULTING, INC.; MICHAEL RILEY, PROFESSOR, UNIVERSITY OF MARYLAND UNIVERSITY COLLEGE;

JAMES R. O’BRIEN, VICE PRESIDENT FOR DISTRIBUTION

AND POSTAL AFFAIRS, TIME INC.; AND HAMILTON DAVISON,

EXECUTIVE DIRECTOR, AMERICAN CATALOG MAILERS ASSOCIATION

STATEMENT OF WILLIAM BURRUS

Mr. BURRUS. Thank you Mr. Chairman, Chairman Lynch, Ranking Member Chaffetz and members of the subcommittee. Thank

you for providing the opportunity to testify on behalf of the more

than 250,000 members that we are privileged to represent. We are

proud to work for the Postal Service, the largest and most efficient

postal system in the world.

I ask my written remarks be entered into the record, please.

Mr. LYNCH. Without objection.

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Mr. BURRUS. I begin by thanking you for scheduling a hearing

on the subject, Workshare Discounts. This is a topic of great interest to our union and we appreciate the opportunity to share our

views. The law that requires the Postal Service to provide universal service at uniform rates is absolute. There are no exceptions for

large or small mailers or for great or short distances between senders and receivers. This universal service obligation justifies the

Postal Service monopoly and restricts competitors who would attempt to skim the profitable segments while leaving the poor, the

handicapped, and those living in rural communities to fend for

themselves.

Unfortunately, the Postal Service in concert with major mailers

has implemented discounts that violate the standard of universal

service at uniform rates. This is not only illegal, it is also self-defeating, depriving the Postal Service of the revenue to maintain the

Nation’s mail network.

Workshare discounts were introduced in the 1970’s, but as early

as 1990 the Postal Service acknowledged that the relative value of

presort is declining. Today workshare discounts artificially reduce

the mailing costs of favored customers at the expense of individual

citizens’ small businesses.

The law stipulates that workshare discounts may not exceed

postal costs avoided. However, the PRC has repeatedly found the

discounts exceed this standard. Most recently, they found that 30

types of workshare discounts exceeded the postal cost avoided.

When discounts exceed the standard, the result is that individuals

in small businesses contribute a larger share of the institutional

cost, and, contrary to sound economic principles, as postal efficiency has increased, workshare discounts have also increased from

7.6 percent of the postage rate in 1976 to 23.9 percent in 2009.

This is a Ponzi-like scheme that Bernie Madoff would be proud of.

The Postal Service begins with a monopoly power to set rates,

then diverts volume, resulting in a self-induced exaggeration perpiece cost to set the discounts. At the same time, discount-funded

private mail processing plants are open, while more efficient postal

processing centers are consolidated. The results benefit major mailers, while making the Postal Service less efficient and more expensive.

In response to reduced mail volume and the crushing burden of

prefunding future retiree health care liabilities, some have opined

that postal workers must make wage and benefit concessions to

fund this transfer of revenue and productivity.

For the record, I have challenged the Post Master General to set

employee compensation at a rate that is lower than the discounts

offered to major mailers. Simply put, pay postal employees at the

cost of the awarded rate. He has not responded to date, and I don’t

expect him to.

APW has long asserted that postage discounts in their current

form are indefensible and illegal. So now the Postal Service and

major mailers are attempting to change the standards, and we urge

Congress to reject any such change.

Regarding the excessive workshare discounts, the burning question is, why? Why would the Postal Service forego billions of dollars

per year in revenues, particularly when they are projecting a $7

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billion loss? When it is suffering from reduced volume, the

unachieved payment schedule for future health-care liabilities, and

the cultural shift in communications I ask, why? One anticipated

answer is volume. However, history shows that rate increases

equal to or below the rate of inflation have only a marginal effect

on volume. The record shows that volume has declined by more

than 30 percent at a time when postage rates, when adjusted for

inflation, are at their lowest level in 50 years. A graph attached to

my testimony shows that even as discounts have increased, volume

has declined.

Workshare discounts and other give-away programs have peaked

at the same time that mail volume has plummeted. If rates indeed

drive volume, we would expect the opposite to be true. So given the

data, why would the Postal Service set discounts above the legal

standard?

A defense that cries out for review is the assumption that if not

for the illegal rates, volume would have declined even further. Such

a defense shifts the burden of proof to the unknown, the impossible

to prove, and evades the requirement of the law.

The American public is entitled to know why the cost avoided

and uniform rate standards have been breached. I respectfully ask

that Congress provide the answer.

Thank you for the opportunity to testify and I will be pleased to

answer any questions you may have.

Mr. LYNCH. Thank you, sir.

[The prepared statement of Mr. Burrus follows:]

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Mr. LYNCH. Mr. Buc, you are now recognized for 5 minutes for

an opening statement.

STATEMENT OF LAWRENCE G. BUC

Mr. BUC. Chairman Lynch, Ranking Member Chaffetz and other

subcommittee members, I appreciate the opportunity to testify this

afternoon. My name is Lawrence Buc. I’m the president of SLS

Consulting, Inc. I’ve been analyzing Postal Service costs for 35

years. I’m testifying today on behalf of the Magazine Publishers of

America, the Direct Marketing Association, the Alliance of Nonprofit Mailers, the Association for Postal Commerce, the Parcel

Shippers Association, the National Postal Policy Council, and National Association of Presort Mailers.

My prepared testimony makes three important points. First the

Nation, the Postal Service, mailers and consumers, all benefit from

combined total cost of preparing, transporting, sorting and delivering mail.

Second, correctly priced work-sharing gets us there. It’s the only

way to get lowest combined cost. And it also induces large mail volumes.

Third, setting work-sharing discounts at the right level is complex. I’ll now address each of these points in turn.

First, total lowest mailing cost and large mail volumes benefit

the Nation and all members of the mailing community. The Postal

Service may have a monopoly on the mailbox, but it does not have

a monopoly on overall forms of communication. Cost and prices

matter to businesses, not profit entities and government organizations as they make decisions regarding the best channel to use for

communicating with customers, prospective customers, donors and

constituents. That’s why it is important to achieve the lowest total

mailing cost.

My second point is that work-sharing gets us lowest combined

cost and large mail volumes. With work-sharing correctly priced,

work will be performed by those who can perform it at least cost.

In many cases this will be postal employees. Work-sharing discounts are correctly priced when they equal the cost the Postal

Service avoids by the work-sharing activity. That sends the pricing

signal that it incents efficient behavior and results in whoever can

do the work at least cost actually doing that work.

If discounts are less than costs avoided, the Postal Service performs work that others could perform at less cost. And if discounts

are more than costs avoided, others do the work that the Postal

Service could perform for less. Both of these unnecessarily increase

costs. Work-sharing results in far more mail, both through lower

prices and by stimulating the overall use of mail.

According to econometric analysis, Dr. Edward Pearsall, a consultant to the Postal Regulatory Commission, work-sharing is responsible for half of all mail. In other words, there is twice as much

mail today as there would be without work-sharing. Without worksharing, according to Dr. Pearsall, there would be closer to 85 billion pieces of mail, with 169 billion pieces projected for this year.

Think about the Postal Service’s financial situation with only 85

billion pieces of mail. Actually it’s almost unthinkable.

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It’s important to realize also that the Postal Service has large

fixed costs that are not affected by changes in mail volume. More

mail lets these fixed costs be spread over more mail volume, and

that results in lower prices for all mail. And incidentally, worksharing mail is more profitable than other mail. For example, Postal Service data show that with first class letters, work-shared

prices—work-shared pieces contribute almost a nickel more to Postal Service profitability than do single-piece letters.

My third and final point is that estimating costs, costs avoided

and setting work-sharing discounts at the right level is complex.

The Postal Service processing, transportation, and delivery systems

are large and complex. Consequently, estimating costs and cost

avoidances is also complex. My testimony—my written testimony

provides several examples.

Under the 1970 Postal Reorganization Act and continued with

the new Postal Reform Act of 2006, final responsibility for postal

costing and prices was delegated to the Postal Service and the

Postal Regulatory Commission. There have been and there always

will continue to be differences as to whether the PRC and the Postal Service are getting it exactly right. But generally they are doing

a very good job. Not in every single case and not in every single

detail. You certainly wouldn’t expect perfection in a system this

large and this complicated. In general, they have done very well.

Thank you and I will be glad to answer any questions.

Mr. LYNCH. Thank you, Mr. Buc.

[The prepared statement of Mr. Buc follows:]

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Mr. LYNCH. Dr. Riley, you are now recognized for 5 minutes.

STATEMENT OF MICHAEL RILEY

Mr. RILEY. Thank you for letting me testify before you. I am here

because I care about the Postal Service as an institution. I care

about the people and I care about the customers and I don’t like

the way things are going. The Postal Service is dying from self-inflicted wounds because it has discounts that have gone crazy, and

they need to be scaled back.

Vice President Robinson testified that the Postal Service would

never do anything to harm its customers or any segment of its customers. And to that I say: Well, stop with the Saturday delivery

plan, do not end Saturday delivery, keep the thing going.

And while I’ve got your attention, I would like to make two more

proposals to you. I think the law needs to be changed, the retiree

health-care provision in the 2006 act needs to be changed to put

the Postal Service on the same position as any other major company in this country and ought to be structured like a mutual insurance company or mutual savings and loan, so that people realize it needs to earn a profit to provide the capital for new products,

for new buildings, for expanded service, for converting the fleet to

hybrid vehicles instead of the old-fashioned 1995 long-life vehicles

still out there.

I’m going to give you a little background. In 1994, in spring, I

sat before this committee with Chairman Bill Clay, and I’m going

to show you a graph as to what it was like. Then the worst-ever

year of the Postal Service happened in 1993, and I joined Marvin

Runyon in August, with 6 weeks to go in that year. In the spring

of 1994 I sat before Congressman Clay, and I walked up to him

today and said, You know, I testified before your father back in

1994 and he was very——

Mr. LYNCH. The Honorable Mr. Clay is here today. I just want

to acknowledge that.

Mr. RILEY. And he let me go for a bit, and said his father died

in 1976. I apologize to you for mistaking one for the other.

I’m going to tell you one more story. Back here a Congressman

named Steny Hoyer, who was rising in the House of Representatives, told Marvin Runyon he was full of beans when Marvin said,

I’ve got the place turned around. He said, I’ll eat crow if you can

turn this place around. And I was at the ceremony where Congressman Hoyer came to the Postal Service and cut the first piece

of cake in a giant crow cake. He made a wonderful speech.

The Postal Service had 4 years of billion-dollar profits, and it did

it because it focused on the individual as the recipient. We had a

balance score-card strategy focusing on the customer, the employee,

and the finances of the Postal Service. We had an incentive system

that backed it up.

And Marvin Runyon—this chart goes only to the third quarter of

1998, because that’s when Marvin Runyon stepped down as Post

Master General and when I stepped down as CFO. This is the

chart I showed the board of Governors at my last meeting as CFO.

At the time, the major mailers were saying the Postal Service is

earning too much money, way too much money. Profits are excessive. And new management promised to solve that problem, and

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solve it they did. They managed to get almost nonstop billion-dollar

losses, with the exception of 3 years, thanks to the work of a guy

named Bill Tayman, who was able to get the government to realize

they were overcharging the Postal Service for CSRS retiree costs.

The Postal Service has excess discounts. Congressman Connolly

summed up my position exactly when he said that when you have

a way to save money, you save it equally; you save it so the Postal

Service gets some of the benefit and so the mailer gets some of the

benefit.

Vice President Robinson said, Well, gee we have this percentage

markup, and as I tell my MBA students, you can’t spend percentage, you can only spend cash. And because focusing on the wrong

things—and the Postal Service has—it has a strategy that focuses

on the representatives of the major mailers as customers, it focuses

on productivity, and frankly productivity is applied as service. If

you cut one person up behind the window and have an hour line

wait, that means your productivity goes up. But it sure doesn’t

mean the customers like you any better.

I for one used to be an avid postal customer. I got cured from

having bad problems with the Postal Service in the last 2 years.

The Postal Service needs to put the service back and focus back on

the individual customer and not on just the discounts and who can

justify the biggest share for their person.

When we were having record profits for 4 years, we didn’t have

to have a price increase. And that benefited the major mailers. And

I would argue that today the Postal Service has driven away its

customers.

I was showing one of the Representatives earlier today in the

room, the Annual Report of the Post Master General of 1872. The

Postal Service has been crying the sky has been falling because of

the electronic version for 1882. Back in 1993, we had a report that

said the Postal Service was losing huge market share every year

to e-mail. My kids got their first computer in 1983, but in 1872 the

Post Master General complained that with the recent advances in

mystic Casini’s fax machine, the Postal Service is going to be completely threatened with going out of business. 1872. It took 100

years for the fax to come in. When it finally did, it was gone in 20.

And I’ve used my time, Mr. Chairman. Thank you. I would ask,

in summary, make them scale back the discounts, change the law

to help on the retiree costs and the profits, and do not let them go

to 5-day-a-week delivery.

Mr. LYNCH. Thank you.

[The prepared statement of Mr. Riley follows:]

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Mr. LYNCH. Mr. O’Brien you’re now recognized for 5 minutes.

STATEMENT OF JAMES O’BRIEN

Mr. O’BRIEN. Mr. Chairman, my name is Jim O’Brien. I’m the

vice president of distribution and postal affairs for Time Inc., the

largest magazine publisher in the United States. I’m testifying

today on behalf of Time Inc. and the Magazine Publishers of America, the industry trade association for consumer magazines.

About 90 percent of printed magazines in this country are delivered to their readers via the Postal Service. Time Inc. and the MPA

care greatly about the Postal Service, its financial situation, its future viability and its effectiveness in controlling the costs of periodicals class.

We have been longtime partners with the Postal Service in examining postal and mailer operations to improve efficiency, streamline

mail processing, and reduce costs.

In 1998, I participated in a joint USPS Periodicals Mailers Task

Force. We visited 17 postal facilities at all hours of the day and

night to see every step in the processing of periodicals mail. Following our 1998 joint task force, the Postal Service issued a strategic

improvement guide for flat processing. A main focus of the guide

was to reduce the manual processing of periodic mail. To do our

part, Time Inc. and MPA members had made significant investments in an ongoing effort to identify and implement ways to minimize the work required for the Postal Service to process and deliver our magazines.

I brought with me today a carrier route bundle of Time magazine. Bundles like this are trucked by Time Inc. from our printing

plants to USPS facilities that are located very close to the subscriber’s zip code. This bundle remains intact throughout the process

until it is opened by the letter carrier. This is the most efficient

product that we can deliver to the Postal Service. The Postal Service and the Postal Regulatory Commission agree that preparing

mail in carrier route bundles saves the Postal Service money.

In 1989, 29 percent of periodicals mail was sorted to the carrier

route. In 2009, carrier route sorted mail grew to more than 55 percent. However, despite the industry’s successful efforts to improve

efficiency and reduce cost for the Postal Service, periodicals costs,

as measured by the Commission, continue to outpace inflation.

Why hasn’t the Postal Service been able to take advantage of the

industry’s cost-cutting efforts and its own investments and equipment to improve automation? I have learned from many years of

analyzing postal operations and cost that the key problem facing

the Postal Service and the major reason for the continuing increase

in periodicals cost is excess capacity. In my experience, excess capacity often leads to manual processing, despite the availability of

automation. And manual processing leads to increased costs.

The strategic improvement guide for processing was crystal-clear

on this point. The report states, ‘‘The inability to capture and process bar-coded flats through automation results in a significant cost

differential. In fiscal year 1997 we failed to automate over 6 billion

bar-coded flats.’’

Mr. Chairman, I visited a postal facility just 3 weeks ago and observed an operation that the USPS refers to as a ‘‘bull pen,’’ which

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is an entirely manual operation. Saw that 3 weeks ago. After

spending billions of dollars on automation, the USPS continues

today to manually process periodicals mail. This manually processed—this manual processing isn’t requested or desired by periodicals mailers, it is the result of choices made within the Postal Service. Yet the Postal Service attributes these costs to the periodicals

class.

In analyzing costs, the Postal Service assumes that all costs are

incurred efficiently and that all worker time and other resources

spent on processing a particular class of mail are needed by and

of benefit to that mail. Charging periodicals for the extra costs of

manual processing that periodicals publishers did not request and

do not need is unjust and unreasonable.

The bottom line is while the magazine industry has provided the

USPS with more cost-effective mail, periodicals unit costs as measured by the Commission have risen since 1986 by more than 300

percent, 107 percent above inflation. Between fiscal year 2006, the

year in which the PIAA was enacted, and fiscal year 2009, the CPI

increased by 9.8 percent. Periodicals unit costs as reported by the

Postal Service increased by 24 percent.

Something is clearly wrong with the cost attribution process in

the manual processing of periodicals mail. Periodicals mailers

should not be asked to shoulder the burden of cost they did not

cause. Thank you.

Mr. LYNCH. Thank you, Mr. O’Brien.

[The prepared statement of Mr. O’Brien follows:]

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Mr. LYNCH. Mr. Davison.

STATEMENT OF HAMILTON DAVISON

Mr. DAVISON. Thank you, Chairman Lynch. Thank you for your

invitation to testify today. I represent the American Catalog Mailers Association. Half of America buys from catalogs, and for those

who do buy from catalogs, when it arrives, it’s arrival is something

that’s exciting and helps keep mail interesting and relevant to all—

to the recipient.

Catalogs also provide significant social benefit delivering goods

and services to the infirm, handicapped, elderly, and rural Americans, none of which can access stores easily. Catalogs are also ecofriendly. They may be America’s biggest carpool. They save countless hours of driving and fuel and congestion on the road and are

particularly helpful to single parent—time-starved single-parent

families as well as dual-income households.

In 2006 Congress modified the ratemaking cost, but the cost accounting approach has not been modernized. The one that is in use

today is a result of 36 years of intense litigation, and as far as I’m

aware, has no parallel in any gap regulation or private industry

standard cost system that is in widespread use.

Time doesn’t permit me to delve deeply here, but I would say

that the setting of prices and allocation of costs is an extremely

complicated area that is properly placed with USPS management,

with the review and concurrence of its regulator.

The USPS is a high-fixed-cost system that is operating below its

available capacity, and as more volume leaves the system, the remaining fixed-cost base has to be spread over fewer and fewer

pieces. Using a nonstandard justification to push prices up just further perpetuates that downward spiral. In fact, standard flats—the

standard flats mail category was covering its costs until 2007 when

there was an enormous increase in postage costs that drove a lot

of catalogs to reduce their circulation. And further increases in this

environment would be counterproductive and serve only to divert

more catalogs out of the mail, put more companies at risk, and undermine the entire system.

I think there’s some useful concepts in private industry. For almost every company there are products that the profitability of

those products vary, and yet customers buy across many different

categories. Companies regularly look at the sales in each customer’s segment and try to understand the segment’s profitability.

Applying this to catalogs, we mail in standard mail flats, but we

also mail an almost equal proportion in carrier route, which generates a net contribution to the USPS.

We also, however, originate mail and standard mail letters, and

standard mail postcards. We send profitable first class mail and we

also spend almost as much on partial shipments as we do on sending catalogs, of which USPS is a relatively small market share

there, and that provides an additional growth opportunity.

I think the key to the future survival of the Postal Service is to

understand their total customer segment contribution. As illustrated above, taking decisions on a single product category can lead

to changes in volume in other categories from that same customer

segment. The goal must be increasing the total contribution from

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each market segment by optimizing the price and volume relationship.

The greatest segment contribution is not always achieved by the

highest price per piece. Sometimes a lower price which generates

a maximum volume is one that is more profitable and sustainable.

This is especially true in a volume-sensitive system with excess capacity.

A customer-segmented approach also allows USPS to manage the

content of the mail stream, the amount of highly valued mail from

the recipient’s point of view.

With all the communications alternatives available today, it is

critical to keep Americans engaged and interested in the mail.

Managing the content does just that. Perhaps ironically just when

the USPS is automating the flats mail stream, there are developments that threaten the amount of flats being processed. The

USPS expects to dramatically reduce its cost to process flats with

this equipment, but this will only occur if we do not drive flats out

of the system before the automation comes on line.

So to summarize, the unique postal accounting system developed

through years of litigation may not accurately reflect postal cost

and certainly does not capture the market behavior of customer

groups. The infrastructure of the USPS is hard to reduce and the

system needs to retain and grow volume. The catalog industry,

which is a significant demographic tail wind behind it, is a great

segment for the USPS managers to be focusing on for long-term

growth.

As catalog postage goes up, catalog volumes are going down.

Since 1997 inflation has risen 37 percent, but catalog postage has

gone up 58 percent, fundamentally altering the economics of cataloging, both reducing mail volumes and industry employment. In

fact, the entire catalog supply chain remains severely strained from

these large postal rate increases.

Thank you for the opportunity to testify, I will be happy to answer questions.

Mr. LYNCH. Thank you, sir.

[The prepared statement of Mr. Davison follows:]

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Mr. LYNCH. I now yield myself 5 minutes.

President Burrus, I know that in my early days on this committee, you’ve been an energetic advocate of, I guess, right-pricing the

costs of these items that don’t necessarily cover their actual delivery costs. And you’ve pointed out that’s a real flaw in the current

system. And if I read your testimony correctly, it states that first

class single-piece mail makes a larger contribution to the overall

institutional costs than its workshared counterpart. And I just

wanted to hear your views on whether or not you can explain that,

why that is occurring.

And No. 2, is it right to try to assign at least the attributable

cost of each piece of mail that goes through the system or, as Mr.

Davison has sort of insinuated or argued, that you should look at

the carriers’ costs across various products.

Mr. BURRUS. The problem with—my mic is on isn’t it?

Mr. LYNCH. It is, yeah.

Mr. BURRUS. The problem with the attributable cost is that—and

I’ve heard several witnesses respond to questions regarding it—is

it takes the resulting contribution, the discounted rate, and from

that they assign it attributable cost. APW’s argument is it’s a discounted rate, it is too steep, that the discounted rate should be

higher than it is, then the attributable cost goes up, setting aside

for a moment the percentages between nonattributable and attributable.

But if the mailer is paying for the piece, then the contribution

to the attributable, the institutional cost is increased. Our argument is that the discount is set too high. They are paying—postage

rates are too low.

It is really disturbing to me to hear witness after witness talk

about the success of the program, and the Postal Service is projecting a $7 billion loss.

Now, how can you forego—forgive over $1 billion a year in discounted rates and lose $7 billion? It just defies logic. It is like we’re

living in a different land; there are different economics that apply

to the Postal Service that don’t apply in the supermarket or someplace else in our society.

The real assault on the U.S. Postal Service and its work force is

when you set a discount at the cost avoided, and you take mailer

out of the system, the mail that’s lost—that is left, that is avoided,

is more expensive. We have to have a network that serves the Aunt

Minnies of the world, the single piece. Now if we have a major

business in the community, then the volume is high and Aunt

Minnie’s mail is incorporated, integrated with all other mail, so the

cost is reduced. Once you take all the other mail out of the system

and presort it, apply workshare discount, you leave Aunt Minnie’s

mail, singular, like the flats that were mentioned, you leave only

the most difficult mail in the system and the cost automatically

goes up. And that is the standard they use to determine the cost

avoided, what they leave the U.S. Postal Service.

This entire workshare-discounted program has turned the rate

structure of the Postal Service on its head. It is not generating volume consistent with the work that is performed because they are

charging deflated costs for the same work.

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I attached to my testimony two examples, of two letters, one

where the rate paid was 42 cents, the other 34 cents, an 8-cent difference for that letter, and the indicia on the envelope were exactly

the same; meaning they were handled the exact same by the U.S.

Postal Service, including delivery.

The Postal Service cannot exist if they are setting up a companion system in the private sector to perform the exact same purpose,

the same functions. They will spin off sufficient revenue that cannot exist long term.

Mr. LYNCH. Thank you. I know my time has just about expired.

The chair recognizes the gentlelady from the District of Columbia,

Ms. Eleanor Holmes Norton, for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman. I thank you for yet another hearing on what I must say is a failing, if not obsolete, model

known as the U.S. Postal Service. And I think your hearings on

various aspects will lead us to where Postal Service isn’t—certainly

isn’t leading us to where I think some hard decisions have to be

made.

For me, I must say this is a straight mathematical, if not arithmetical, exercise. If there are savings, if they are worth it, then

there is a discount; if not, it’s not. And I don’t see why it is more

complicated than that, especially considering the urgencies surrounding the financial conditions of the Postal Service, albeit with

slight improvements that really don’t matter because the model is

failing in any case.

Work-sharing is like the rest of the post office. It may have made

some sense long ago when it was instituted, when automation was

not the way in which the Postal Service operated, with less and

less manpower of its own. But if the whole point is to modernize

the service, if you get a model that works, I don’t know why we

would stick to this part of the model unless it can justify itself.

I’m sorry I was not here to hear the testimony. I don’t know if

anyone has tried to justify the model. I was presiding in the Committee of the Whole on the floor, but I would be very interested to

hear what justifications for the model exists in dollars and cents

frankly, count it out. I mean, you know, there are harder—harder

issues to figure out in the Postal Service that do not lend themselves to the same kind of numerical equation that I think could

be done here.

What most concerned me is, is there a cost to individuals in

small businesses? That simply cannot be tolerated. And there is

some testimony, as I look through the testimony, that indicates

that may be the case.

Look, if we all want to use this model, we’re all going to have

to do something very different from what’s been done before.

Eighty percent, or something like 70 or 80 percent of the American

people in polls say, OK, eliminate Saturday delivery. Saturday delivery is a fairly recent phenomenon of recent decades, but I’m not

sure what it will take to get that change, if that change is to occur.

But the notion that we’re sitting with the same model we’ve been

having hearings about, I must tell you is very troubling to me,

which is why I am pleased the chairman has chosen this aspect to

consider here today.

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The fact that—I was not aware until this hearing that worksharing was almost all that occurs in the Postal Service these days.

It has taken over the Postal Service; 80 percent of the mail is workshared. So little has changed about the Postal Service.

Mr. Chairman, I haven’t been here long enough to ask truly intelligent questions. I simply want to go on record as saying I think

the Postal Service has to be pressed much harder not to do what

it’s been doing, saving here and there around the edges. We’re delaying the inevitable. It’s just too late to do that. We have simply

got to fish or cut bait. This model doesn’t work.

I don’t know if enough people, Mr. Burrus, are going to retire in

order to help the situation involving personnel. I don’t know if they

will make decisions about work-sharing. I don’t know if they are

going to quickly get to a recommendation on 5 or 51⁄2-day mail. All

I know is it’s going much too slowly to save the Postal Service. And

above all, I want to urge greater efficiency, as it were, on the part

of the Postal Service in getting themselves a brand new model and

coming before this committee to share it with us.

Thank you very much, Mr. Chairman.

Mr. LYNCH. I thank the gentlelady.

Mr. Buc, let me ask you, the Postal Regulatory Commission’s

most recent annual compliance determination revealed that, I

think, 30 workshare discounts exceeded their—their avoided costs;

seventeen of them were justified under statutory exceptions, but 13

were not justified.

Have you had an opportunity to review that, you know, those—

at least the cases that were brought forward? And do you think

that the PRC’s determination was justified or do you take exception

to that?

Mr. BUC. I haven’t reviewed each and every one of them in great

detail. The PR—the Postal Regulatory Commission is the umpire

in this world that calls the balls and strikes. We may argue with

him occasionally, but most of us defer to them in judgments like

this. Again, my testimony is that, in general, discounts should be

equal to costs avoided. I don’t believe that they should be less. I

also do believe, in general, that they should be more.

Mr. LYNCH. How do we—well, they found—they found differences

here that we had departed from the ideal of matching the discount

to the attributable cost. And so now they are struggling, as you

heard at the previous panel, struggling to meet the goal of aligning

the cost with the charges. And I know that you’re concerned about

that.

Do you have any suggestions as to how they might align those

costs without causing undue damage, or perhaps less damage, than

otherwise might through this exigent rate case?

Mr. BUC. It’s a very, very hard question. You ask many people

the same question. In the long run, it can’t be the case that all

products sell below their cost. You simply can’t do that in the long

run.

But in a situation where costs are above price, there are actually

two possibilities to get things lined up. One possibility is that you

can reduce costs to be where the prices are. Mr. O’Brien has spoken about the flats world, where perhaps some things could go on

that would take care of that. The other possibility is that you

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would raise prices to cover some of those costs. And the Postal

Service needs to be careful that it doesn’t drive volume away. As

you all know, in the world today, mailers have lots of alternatives.

Ms. Robinson testified the choice is not between work-sharing

and not work-sharing for many mailers. It is between mailing at

all and not mailing. So the Postal Service has a really tough problem. If I had the solution, I would actually give it to them.

Mr. LYNCH. Thank you. Part of this, we’re confronting this in a

very difficult time. A rising tide lifts all boats, and in this case the

tide has gone out and so every sharp rock, every shoal is now exposed, and so we’re trying to meet that challenge. It is a very difficult situation. And I understand for every reaction we take care

to try to—to try to align costs with—align charges with the costs

that those deliveries incur, we risk losing that volume of mail,

which is exacerbating the situation. So we’re between a rock and

a hard place here. And we’re trying to, I think, manage the current

situation with the idea that if volume picks up, if we gain a fair

amount of the market share and the volume that we’ve lost, that

we can live to fight another day. I’m just trying to find out from

the mailing community what that looks like. What can we sustain

going forward without causing us greater harm?

Mr. BUC. We actually have some optimism about some of the volume coming back in standard mail, marketing mail. Through the

recession the Postal Service has actually kept its market share and

increased its market share a little bit. So as the economy recovers,

we’re very optimistic that there will be more marketing mail.

In first class mail, the prospects are not quite as optimistic. It

turns out that historically every time the Postal Service has granted a new work-sharing discount, people have found new ways to

use mail. And I do believe that’s been responsible for much of the

growth of postal volume over the years. There are some opportunities for additional work-sharing discounts that the Postal Service

might think about availing itself of.

Mr. LYNCH. Thank you.

Ms. Eleanor Holmes Norton, you’re recognized for 5 minutes.

Ms. NORTON. No. No further questions, Mr. Chairman.

Mr. LYNCH. Thank you.

Dr. Riley, you went a little bit afield from your original testimony, but it was interesting nonetheless. I know you got away

from the pricing question and spoke a little bit about the 5-day delivery question. And my own concern is this: that if we somehow

eliminated Saturdays, then I actually think it puts us in a more

difficult financial situation with the Postal Service. We would lose

not only the Saturday delivery and that revenue, but I also think

that customers may say, well, if they’ve got mail that’s going out

on Thursday, or—you know, or Friday, they’ll say, Well, you know,

the post office—not the post office—but there will be no delivery on

Saturday and Sunday. If there is a holiday on Monday, maybe I

ought to call USPS or FedEx or someone else, so there will be a

migration of mail volume that is currently relied upon by the Postal Service to sustain its operations so that, at the end of the day,

it’s a self-inflicted wound. It doesn’t make the Postal Service

stronger, it actually may make it weaker, and considerably so.

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I’d just like to hear what your thoughts are. I know you’ve talked

about that in your original testimony, but I would like to hear your

thoughts on that.

Mr. RILEY. I think—am I on—I think you’re precisely right. Congresswoman Norton talked about the business model being broken,

and the business model is broken because people chose to break it.

Saturday delivery, I think the Postal Service says that 71 percent

of the people say they don’t care, which means 29 percent of the

people do care. Why do you want to anger 29 percent of your customers and drive them away, to finally give up and say, you know,

I’ve had it, I’m going electronic. It makes no business sense.

I can’t think of one service organization in this country that looks

to prosper by cutting back on its service. If you go to the FedEx

Kinkos in Herndon, VA, which I did to get the charts printed up

so you could see them, you’ll discover they are open 24 hours a day,

7 days a week.

Service businesses are in business to provide service, and the

Postal Service has gotten away from that. In general terms, the

Postal Service raised the price of a first class stamp 37 percent

since 1998. Over that time, inflation has only gone up 33 percent.

It has gotten rid of 20 percent of the work force and it is sill losing

money. It should be coining money and it is not, because it is driving customers away for some of the smaller self-inflicting wounds.

And Chairman Lynch, you’re exactly right; this would be a huge

self-inflicting wound. And I believe the Postal Service will not recover if it is allowed to proceed with that. Not that I feel passionately, you see. I have devoted most of my life to the Postal Service.

Mr. LYNCH. I still have some time left.

Mr. RILEY. Sorry.

Mr. LYNCH. What about the idea—I know a lot of e-mail is just

person to person, so that’s probably not as big an impact on the

Postal Service, because they weren’t necessarily writing letters to

each other, and that wasn’t volume that was eliminated. But I do

know that it is quite common now, even myself paying bills by

mail—excuse me, by the Internet and on line, and there is a huge

volume of mailers disappearing.

And so I think it is irrefutable that we’re going to a new model

here. And I don’t know, you know, you’re much more familiar with

this in your teachings and in your studies than I am, but at least

the anecdotal evidence I see is fairly powerful.

Mr. RILEY. I converted last summer to paying bills electronically

because I couldn’t get my mail sent to where I was. And that’s because I was going to be in different spots in the country at different

times. And I was willing to pay $15 a week for Snowbird mail to

put it all in a priority mailbox and send it to me. It would only go

to one address, and I could only choose one at a time and I had

to specify the dates in advance.

In a world where I can go online to every one of my credit cards

and change my bill once a month with a password-protected device,

I can’t get my mail sent to where I’m at. So my solution was to

pay my bills on line.

The Postal Service—if everybody in this country knew about

Snowbird mail—and there are 38 million retired people in this—

38 million people over 65. And if that’s—if just 5 million of them

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were to use 10 weeks of Snowbird mail, that would add $750 million in revenue and the cost would stay the same, because the Postal Service is already forwarding most of that mail piece by piece

anyway. It’s more efficient to put it in a box and send it out.

So there are a lot of good things the Postal Service could do to

change the business model to take into account what’s going on in

this era. My daughter has been paying her bills on line forever,

worried about identity theft and thinking about moving back. Does

anybody ever advertise the Postal Inspection Service and say that

mail fraud is still a crime and 96 percent of the people charged

with mail fraud get convicted? Try getting somebody convicted for

mail fraud over the Internet.

I think there’s a great business model that could happen that is

being ignored. I think your instincts are right on.

Mr. BURRUS. Mr. Chairman, I think there is a misconception that

postal volume is driven by personal communications. A lot of personal communications has migrated through electronics, Internet,

Tweeters, telephone and other. That is a very small percent of total

volume. Postal Service volume is driven by commercial mail. I get

more mail today, even with the decline, major decline of volume.

I get more mail in a month than my father received in his entire

lifetime. So there is no connection between growth of volume. In

2006, the Internet did not go on vacation; we reached our highest

point of hard-copy communications in this country, in the world, in

2006.

Mail is tied to commerce. As the economy grows, mail volume

will grow. This side show of individuals sending birthday cards on

the Net, certainly we would like to have all the mail, we would like

every message to be converted to hard copy, but we can grow without it. The Postal Service is an advertising company. They have to

understand and appreciate the fact that they have to grow. Their

growth will be in commercial mail, letter mail, not in parcels. It

will be in letter mail.

And if they fail to capture a growing market in letter mail, they

can’t exist in niche services.

Mr. LYNCH. Thank you. I think the truth is somewhere in between here, that all this mail is not going to go away. I think a

lot of mail is going to come back with the economy and advertising.

I also know there are technologies out there. I know—I think it

is Sweden or Finland, where you can go on line and actually see

your mail before it’s delivered, and click on it if you want it delivered and, I guess, dispose of it if you don’t want it delivered. And

I think as that greater sort of interaction with the customer becomes more commonplace, I think we have to recognize that technology will be out there. So we’re trying to provide—we’re trying

to reconstruct a system and modernize it so that it stays current

and that we don’t fall behind. You don’t become the buggy-whip of

the next century.

We have the same problem here in Congress. We got rid of the

powdered wigs, but that’s about it. We’re still operating the same

way we did back in the 1700’s and we’re trying to keep up with

modern industries that are running circles around us.

Mr. O’Brien, I think it was you, in October 2007—it is terrible

to come here and testify, because we can always throw your testiVerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE
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mony in front of you at a later date—but you testified before the

subcommittee in favor of a recently redesigned rate structure to

better align rates and costs for periodicals. Now several years after

that rate structure has been in effect, do you think that the newer

rate structure has been a success?

Mr. O’BRIEN. Yes, the rate structure actually has caused a great

deal of change. As I said in my testimony today, we used to only

produce 29 percent—the periodicals volume came in carrier route

bundles, the most efficient bundle we can give them. Today that’s

over 55 percent. Without that rate structure, we would not have

incented that change. And that just improves the process.

So the other thing that you should know is this carrier route

bundle, the pass-through of cost savings is 711⁄2 percent. So this is

not one of those underwater products that you’ve asked about earlier today. So if the Postal Service saves a dollar, 711⁄2 cents is

what the incentive would be for the mailers. So this is a good deal

for the Postal Service.

Mr. LYNCH. All right. In your testimony before, at least part of

it, you described the inefficiency with periodicals in that they were

manually processed as something that was undesired and unnecessary on the part of the mailer. Can you flesh that out a little bit

for me?

Mr. O’BRIEN. Sure. Basically the Postal Service has spent billions

of dollars on automation. And when you automate a process, you

sometimes wind up with excess capacity and you need to have that

excess capacity utilized in some way; otherwise people are standing

around. And so what happens is things get created, like these bull

pens, which are basically hampers that are all lined up in a circle,

and people come and take bundles and throw them in these hampers designated to various zip codes in an area.

And so that manual processing exists today. I saw it 3 weeks

ago. I see it in every SCF that I go into, Section Center Facility

that I go into, it exists today. After spending billions of dollars on

machinery, they have to find a way to capture those savings and

not do manual processing of mail today. I mean, it’s a complete—

complete waste of time and it exacerbates the cost for periodicals

mailers. We just can’t have that happen.

Mr. LYNCH. I’m trying to get these straight in my mind. Is that

flat sequencing system? Is that——

Mr. O’BRIEN. It’s not even that. There’s—there are machines

today that will sort bundles and just like this, and so instead of

sorting the bundles on the machine, they’re sorted by hand, and

that’s just insane. The machines exist today, but the Postal Service

segregates periodicals out, puts us on manual processing.

And the way that they track costs is something called the IOCS,

which is an in-office cost system, and the way it works is like this:

It stopped the music. So they stopped the music and say, what are

you holding? I’m holding—I’m holding periodicals. I’m charged to

periodicals. Mr. Riley’s holding a catalog. He gets charged to catalogs. Well, if you automate a process, and you put manual labor on

a certain class of mail, when you stop the music, more bodies are

holding magazines, and we are attributed with the costs. It’s not

right.

Mr. LYNCH. OK. Thank you.

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Mr. Davison, I did recall in your testimony you didn’t really discuss this, you talked around it, but the flats sequencing system and

its potential effects on improving the costing of catalogs. Do you

think this FSS, this flats sequencing system, has promise to address some of the concerns that you raised in your testimony?

Mr. DAVISON. I think it has the potential to lower the cost of

processing catalogs and magazines, and we only have nine machines out today, and they haven’t even been fully accepted; so

that’s a little bit of an unwritten story still. But I have, as Mr.

O’Brien describes, also been in facilities and seen the inefficiency

in the processing of flat mail, and we very much need something

that will automate that and allow it to be handled more efficiently.

I mean, as was said by, I believe, Mr. Waller, the costs in this category have been very high and out of control. We’ve had a 58 percent increase in postage in a 34 percent inflation period. So we’re

much higher than inflation. It’s just not sustainable from our perspective. So we’ve got to—we’ve got to go after the cost side.

Mr. LYNCH. Where are we in that process? You said there are

nine locations that have these, and where are we going, as far as

you know, with full implementation? Has this been stalled, or why

is it not more widespread?

Mr. DAVISON. I can’t—I can’t answer the question for the Postal

Service. I know they’re working very aggressively on it. I know

they’ve been working with us and others in looking how they can

get mail to the front of the machine most effectively and induct it

into the machine automatically. They’ve propagated a number of

changes to the regulations to allow some of those things to occur.

It’s my understanding that they’re still completely committed to

it, and at the same time you do have flats volumes that are dropping. So it’s a little bit of a moving target. Where do you put the

machines, and what is the cost justification of them when you have

so much volume leaving the system? It’s—we’re doing things to

ourself in our pricing that’s driving volume out rather than keep

the volume in and lower the cost basis through automation, which

seems to be a much more sensible approach.

Mr. LYNCH. Let me put a question out there for Mr. Buc and Mr.

O’Brien and Mr. Davison. The pending rate case there, the exigent

rate case that they plan to introduce in 2011, what are your major

concerns with—they’ve indicated a moderate increase. Do you have

any sense of what that means? I mean, we tried to elicit from the

earlier panel what that might actually constitute, but you might

have a better idea.

Mr. BUC. As you know, the Postal Service says that its Board of

Governors speak for them; so I wouldn’t want to speak for their

Board of Governors. But the rumors on the street, and, of course,

there are rumors on the street, is that moderate means under 10

percent and perhaps well under 10 percent. If you go read the

trade press, you’ll see that the trade press is reporting 5 percent

for products that are covering their costs, 8 percent, 7 percent, 9

percent for products that are—I mean, that’s all over the trade

press. So that’s not my number; that’s trade press numbers.

Mr. LYNCH. Is that what you’re hearing, Mr. O’Brien and Mr.

Davison?

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Mr. O’BRIEN. Yes. I think that’s—that’s very accurate. But the

one point I’d like to make on that is they’re talking about a higherthan-average increase for periodicals class and standard mail,

which is the catalogrs. And the point that I’d like to make is before

you do that, make sure that you get the costs right. You know, people don’t object to covering their costs, but they just want to make

sure that the costs are right. Everyone should cover their costs for

sure, but just make sure that your costs are right before you arbitrarily increase someone’s rates.

Mr. LYNCH. Right.

Mr. DAVISON. And I’d—I’d just add to that you have to consider

where we are right now. We’ve just come through a very terrible

recession, and the whole system is strained. There’s just not a lot

of ability to absorb large increases, and we are in a zero or near

zero inflationary environment, and this is a time when jobs are

very important. There’s a lot on the line here.

Mr. LYNCH. I appreciate it, and we spoke to that earlier about

the fragile nature of the Postal Service, so we don’t want to introduce any unnecessary shock, but we certainly do want to bring

those products up to a point where they’re closer to covering their

entire cost. I mean, you can bring it up gradually over time hopefully, but I understand the vulnerability is heightened right now.

Mr. DAVISON. When I ran a retail business, we would have products that weren’t making the average markup, but we would use

those to get people in the store and buy other products. And almost

every business I’m familiar with has a variability between products

of the profitability, and I would respectfully suggest we shouldn’t

look at the product profitability, we should look at the customer

segment profitability and figure out how customers are using the

service and what incents them to buy so that we can continue to

add value in that relationship and develop new products based on

our keen understanding of their unique needs that aren’t being fulfilled today. And I kind of concur with Dr. Riley on that point. To

the extent that you understand customer behavior, you can deliver

products that they don’t even know they need based on that understanding.

Mr. LYNCH. OK. Well, I want to thank you all for your willingness to come to the committee today and help us with our work.

I’m going to leave the record open for 5 legislative days for Members to submit questions, if they have any, for you or for the first

panel.

And with that I will declare this hearing adjourned. Thank you.

[Whereupon, at 5:10 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Dennis J. Kucinich and additional information submitted for the hearing record follow:]

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